The stunning plunge in oil prices – almost 45% since June – has roiled the global oil markets; creating new winners and losers almost overnight. It has also unlocked a number of potential problems and opportunities we would be wise to consider.
In our consumer-based economy, savings at the gas pump provide a direct stimulus to the economy – freeing up a reservoir of new discretionary dollars to fuel the economy. Indeed, SUV and small truck sales are skyrocketing (How soon we forget how quickly gas prices can go up) and fuel-intensive sectors – like airlines – are enjoying record profits.
For others, falling oil prices are not so good. Geopolitically, it has been a disaster for oil-exporting countries; Russia, Iran, Venezuela and others are all getting clobbered. Shale oil producers – with fracking and horizontal drilling costs that far exceed OPEC’s cost for extracting conventional crude oil – are also starting to retrench.
The disconnect between Wall Street and Main Street is growing. While lower pump prices are a bonanza for Main Street, Wall Street and investors in energy and related junk bond sectors are getting edgier by the day – their concerns exacerbated by a stagnant global economy that is dragging down oil demand and putting oil prices into a free fall.
Ironically, Wall Street has hyped one of the drivers, the shale oil “revolution,” as our ticket to energy independence and catalyst for our emergence as the new Saudi Arabia of oil. Seems they forgot that not all oil is created equal; that shale oil depletes rapidly and is infinitely more expensive to extract than the conventionally drilled oil the Saudis have in abundance. The shale oil they so aggressively hyped as a panacea may, indeed, be a placebo in disguise – or worse.
While our shale oil production surge (See: Oil’s Unsustainable Surge) has created a temporary oversupply – exacerbated in part by a stagnant global economy and falling oil demand – we should use this reprieve as an opportunity to prepare for the future. Here are six things we can do:
- Purchase oil “on the cheap” and build up our Strategic Petroleum Reserve. China is doing this now to cushion for the hard times that are sure to come – and so should we.
- Replenish our bankrupt Highway Trust Fund by raising the federal tax on gasoline. The add-on would be miniscule and preferable to the smoke & mirror “gimmicks” that congress now employs to fund the bankrupt Fund. (See: Management by Crisis)
- Acknowledge, in policy terms, that shale oil is not in itself our ticket to energy independence. Its rapid depletion rates and high drilling costs make that impossible; a blended energy mix and demand reduction will be needed.
- Use the “reprieve” as a launch point for remodeling our transportation and energy systems, developing alternative and renewable fuel systems, broadening our demand reduction efforts, accelerating public transit and high-speed rail systems, and migrating to a more energy-efficient vehicle fleet. Lower fuel costs today will help pave the way.
- Beware of “black swan” events: Desperate nations do desperate things. Oil exporting nations, unable to support their national agendas due to falling oil prices, are ripe for destabilization. Likewise, a panicky Wall Street sell-off of shale oil holdings could trigger something worse. Hint: Recall how the sub-prime fiasco started as a ripple.
- THINK: As consumers, let’s remember what four buck-a-gallon gas did to our household budgets and not pretend that pump prices in the two dollar range is the new norm.
It’s hard to say how long oil prices will remain low, but history has shown it takes little to trigger and unleash a chain reaction of volatility and higher prices. If gas prices today seem too good to be true, they probably are – so let’s savor the lower prices now while planning for the future.
— R. Michael Conley, Transition Voice